Frontier markets continue to grow in popularity, at least as measured by fund flows. The equity and debt markets within frontier countries have seen increasing allocations by investors looking to capitalize on their outperformance relative to emerging markets. Equally important, as the performance of frontier and emerging markets has diverged, investors have benefited from the diversification that comes from less correlated assets.
MSCI Frontier Markets Index relative to the MSCI EM Index
January 2006 – February 2014
The chart above shows performance of the MSCI Frontier Market relative to the performance of the MSCI Emerging Markets Index. The outperformance of frontier markets since mid-2011 has been impressive but increasingly investors are asking if it is justified. At Driehaus, we continue to see countries where global investor participation is low and fundamental factors remain favorable, such as in Saudi Arabia. However, given the strong inflows into frontier markets, certain areas no longer reflect the underlying fundamentals. We believe frontier markets remain an attractive opportunity set but we see an increasing need to differentiate between markets by focusing on the underlying fundamentals to pick attractive investments.
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